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Fork Wars Episode I – The Phantom Futures

If you haven’t been living under a rock for the last couple of weeks then you know that the whole block size debate is boiling to a close. Segwit2x arose to be a compromise solution, lead by ex-core developer Jeff Garzik, brokered and agreement in New York after the Consensus 2017 conference which had over 90% of the miners and ecosystem in agreement. Since then BIP91 has locked in, which is an effective lowering of the much exalted soft fork consensus threshold of 95%, by which half of the inner circle of core devs felt was deficient. Regardless of how this was on the surface seen to be a ‘lowering of the standards’ it was done anyway and conveniently so, as segwit was not looking like it would ever pass the 95% bar anyhow (ahem. “I TOLD YOU SO” to all the neckbeards out there, and u/jonny1000!). Now that segwit2x/segwit is going to be ‘forced’ by way of 90% of the miners starting to reject non-segwit signaling blocks, this ensures that segwit’s threshold of 95% of last 1000 blocks will be met sometime in mid-August. (yes, you read correct, BIP91 was an 80% majority agreement to come to a 95% agreement by forcing the 20% to agree with you or be orphaned — by force!).

This has set the stage for the drama to follow. For one there is already a growing group of big blockers who have mobilized to fork off the current Segwit2x/Segwit Bitcoin (let’s call this SegwitCoin) who have identified themselves as BitcoinCash. They are a fork of BitcoinCore 0.14.x with Segwit and RBF components disabled, and a 8mb Hard Fork coded to engage at Aug 1, 12:20 UTC time. This guarantees that there will be a ‘big block’ Bitcoin regardless of what happens with the SegwitCoin and the expected in-fighting among the new ‘stewards’ of the main chain (Jeff Garzik and his btc1 team) vs. the old guard which have been deposed (Bitcoin Core, Blockstream).

Just because this new BitcoinCash chain does not exist as yet, has not stopped some exchanges to offer convertible options contracts to start trading on it. ViaBTC has opened such a contract called ‘BCC’ and has allowed trading on it for speculators who want to buy into the new Bitcoin before its actual launch. Some of you may remember that BitFinex released a similar token to represent a potential BitcoinUnlimited fork (very specific to client) called ‘BCU’ in the past. Quite confusingly they named the BitcoinUnlimited (big block) fork token ‘BCU’ and the BitcoinCore legacy token ‘BCC’, where as the new ViaBTC BitcoinCash (not core) token is called ‘BCC’. (For the purpose of this article I will call the ViaBTC token BCC(ash) instead of BCC to avoid confusion.) The BitFinex BCC was universally criticised as biased and deceptive due to the fact that both BCU and BCC are tradable equally vs USD on BitFinex exchange, but unless you read the fine print, you won’t realize that BCC was redeemable at par with BTC at contract expiry, while BCU was optionally redeemable for BitcoinUnlimited fork coins (BTUs), or nothing at all, at the discretion of BitFinex. To quote from their terms…

Important: Settlement of any BTUs may be delayed in Bitfinex’s sole and absolute discretion. If the BTU blockchain is destroyed, reorganized, or experiences a technical malfunction, in any manner and by any party or source, before settlements have been completed, BTU tokens shall be deemed to have a value equal to zero and shall be confiscated and destroyed by Bitfinex.

So basically, if you buy the Core Token (BCC) you are guaranteed to get back BTC 1:1 at the end of the contract, and so you just wear the counterparty risk of BitFinex for the duration. But if you buy the BitcoinUnlimited Token (BCU) you *may* get a BTU token on the BU chain if it exists… or maybe not if hackers DDoS the chain, or otherwise a ‘technical malfunction in any manner by any part of source’ happens. Yeah, right. Sounds like a bum deal. Also as BU had not published a specific time when a fork would be planned, or even had a fork plan to begin with, the binary risk on the BCU token was massive. So the price of BCU was appropriately low, and the price of BCC was close to par with BTC. Big surprise for folks who understand how to price derivatives. But for most of the public, they looked the price as confirmation of the ‘superiority’ of BitcoinCore team over BitcoinUnlimited team, and by extension its projects. This in all likelihood, was the whole intent of the scheme to begin with, which is to say, a big media stunt made to discredit the anti-core teams.

ViaBTC — Fork futures done better

This time around, a more honest attempt at creating a fair fork futures market was released by ViaBTC. Like the BitFinex scheme, ViaBTC allows splitting of a BTC into a big block token (BCCash) and a legacy BTC token (BTC_FROZEN2). Unlike Bitfinex though, they don’t allow any trading of the legacy BTC_FROZEN2 token, and this means that the betting is just on the existential nature of the BCCash token and what it may be worth after the fork occurs (which unlike in the BitcoinUnlimited case, has a defined fork plan and flag date). Although some say that there is no difference between the token schemes (yes Matt Corallo @TheBlueMatt, I’m looking at you), there is a world of difference. But it takes a financial eye and background experience in markets to see it.

BCCash tokens are virtually guaranteed to exist, as the Bitcoin clients that will be supporting the hard fork have set the flag date of Aug 1, 12:20 UTC to enact the fork.

BTC_FROZEN2, the yin to BCCash’s yang particle, cannot be traded itself, this means that the perceived value of a legacy chain post fork cannot be manipulated by people just buying up the token with fiat (in the case with BitFinex, USD). This cannot be overstated, as although both ‘Core’ tokens in either scheme will be redeemed at 1:1 with BTC after a fork event, the Core token on Bitfinex could be ‘propped up’ in price by large fiat holders, without actually buying BTC. If anti-core buyers of BCU token rallied the price, it would just be a simple matter to buy up BCC tokens to reduce its perceived effect. This is besides the fact that you shouldn’t be allowed to trade a token that has no purpose other that being used to recombine into a BTC token to begin with. (Bitfinex’s BCC has no real purpose, why would this token trade at any discount at all?) This adds unrelated market fluctuations to the price which have nothing to do with the actual fork sentiment.

Allowing the legacy BCC token to trade means that Bitfinex has a hard time to actually effect the splitting of the coins if and when the fork were to occur. You can imagine that as the 2 tokens BCU and BCC are being traded, BTC/USD is being traded as well and some BTC may be pulled out of the system via withdrawals. In order to be able to actually split the tokens Bitfinex needs to keep the same number of BTC on hand and not let their reserves dip below the amount of floating BCC and BCU tokens (1BCC + 1BCU = 1BTC). This means random traders of BTC may be disallowed from withdrawing their BTC funds just because of the action of other market participants. This is not ideal. ViaBTC locks BTC_FROZEN2 asset as these will be the exact BTC, owned by the specific accounts which will be used to split the eventual BCCash coin and BTC legacy coin after the fork. This avoids any potential accounting issues. It is highly likely that Bitfinex can be forced into running a fractional reserve if enough people withdrew more BTC that they need to support the outstanding BCC/BCU token recombinations.

So whichever side of the scaling debate you find yourself on, the market has stepped in to solve the problem for everyone. ViaBTC’s BCC(ash) token which may soon trade in other exchanges (I heard KEX also trades it) and it will finally allow the market to decide which Bitcoin is more valuable. Whether or not Segwit2x actually follows through with its 2x Hard Fork come Nov. 18th is no longer an existential risk for Bitcoin, because the market will have a bigger block Bitcoin that they can always switch to if the scaling debate continues to rage on in the SegwitCoin branch of Bitcoin.